Budget 2012: Higher taxes, subsidy cuts, predicts Deutsche Bank

Two weeks from now, Finance Minister Pranab Mukherjee will be presenting his Union Budget proposals for the new financial year starting 1 April, 2012.

Deutsche Bank’s Global Markets Research has released its expectations on the Budget. Here are the five themes that the brokerage believes the Budget will focus on:

Cutting subsidies: Deutsche Bank expects diesel, kerosene and LPG (cooking gas) prices to be hiked as the government attempts to rein in excess non-productive spending. Urea prices could be hiked as well.Allocations to flagship social schemes such as MNREGS are also likely to see flat or lower allocations.

However, food subsidies might increase as the government introduces the Food Security Bill. But a partial rollout of the scheme could still keep expenditure under control.

Withdrawing previous stimulus schemes: Deutsche Bank believes that stimulus schemes initiated in the aftermath of the global credit crisis of 2008 will be withdrawn. That will most likely be done via raising excise duties across the board by 200 basis points and a widening of the service tax net.

Stimulating investments: The Budget is also likely to contain proposals to improve capital formation. In particular, the ‘sunset’ clause on tax incentives for infrastructure projects is likely to be extended by one year, says the brokerage. New capital expenditure might be offered fiscal incentives. An import duty of 19 percent might be slapped on power generation equipment to protect Indian manufacturers from cheap Chinese imports.

Encouraging retail investments in equity markets: With a decline in financial savings, the Budget is likely to contain measure to channel savings back into financial assets, says Deutsche Bank. To that end, the short-term capital gains tax on equities may be lowered and tax allowances for retail investments in equity mutual funds may be increased.

Changing the personal tax structure: Changes to personal tax structure are also likely to encourage consumption. Deutsche Bank believes the maxium income tax exemption limit could be raised to Rs 2,50,000 from Rs 1,80,000 per annum.

However, a personal tax surcharge (10 percent) on the highest tax bracket might be reintroduced. The corporate tax surcharge might be doubled to 10 percent from 5 percent currently. The minimum alternate tax might also be raised to 20 percent from 18.5 percent.

Watch today’s Budget 2012 video here